ADP Looks Fairly Valued

Last week ADP (ADP) announced earnings that were surprisingly good given the level of job losses over the past year. Over the past year, revenue grew by 1% to $8.9 billion for the year. Excluding one-time items, diluted earnings per share from continuing operations grew 10% to $2.39.

ADP produces some of this earnings per share growth by repurchasing shares. ADP acquired 13.8 million shares during the year totaling $550 million. These repurchases are in addition to the $1.28 per share in dividends that ADP pays. A cash flow statement was not included in their earnings release, but net income for the year was $1.33 billion. The company repurchased $550 million in shares and paid dividends of approximately $647 million. They continue to return money to their shareholders.

Employer service revenues were flat year-over-year, and the number of employees on their client payrolls fell by 2.5% for the year. PEO Service revenues grew by 12% for the year. Dealer Service revenues fell by 11% on an organic basis. Overall, Dealer Services totals 15.5% of ADP’s revenues.

Guidance for the coming year anticipates continued economic and employment weakness with earnings per share remaining flat. Following a year of flat earnings per share, ADP would have to grow at a rate of about 8% over the following 5 years to justify its current price.

This is a strong, stable company that could grow faster than 8.0% per year during an economic recovery, but for now it looks like the shares are pretty fairly valued.

Disclosure: I currently own shares of ADP

Comments

[mretome]

I too own shares of ADP and one thing I would add is that while this stock may not move much until the recovery in the jobs numbers, it's dividend yield of 3%+ makes it easier to sit on my cache of ADP stock.

2009 Aug 18 04:18 PM